Demystifying PACE Financing
I answer questions everyday about various ways to finance energy efficiency retrofits, and the one that people are intrigued about the most is PACE. Everyone has read something about it, but not many people know exactly what is, how it works and when it’s good fit. In this article I’ll hope to demystify it so you can make an informed assessment of your project’s fit for PACE financing.
What is PACE?
PACE stands for Property Assessed Clean Energy is a government-backed program to finance energy efficiency upgrades and renewable energy projects. It is designed to address the financing challenges specific to efficiency and renewable projects, such requiring no money down, longer loan terms (to accommodate longer payback periods, for example), and fixed low interest rates. The main differentiator, however, is that the building is the collateral, not the person or their business. That is, the loan is set-up as a senior lien on the building and is paid as a tax, not as a loan to the building owner or business. So, it does not require a personal guarantee or a high credit rating for the business. This has several benefits for the building owner. One, since PACE is structured as a tax on the property, the payment can be passed on to tenants, which addresses the split incentive problem that so many building owners grapple with when considering energy efficiency investments. And, because it’s a lien on the building, it transfers with a change in ownership, removing the complications of unwinding it if the building is sold.
How does it work?
State and local governments establish, in law or public policy, a specific goal or objective, such as promoting energy efficiency as a means to promote jobs or better air quality. They create the PACE program to provide monies for the initiative. Once the program is created, the government then offers a bond to investors to raise the money or its funded by finance companies selected by the municipality to administer the program. This money is then loaned to businesses (and sometimes consumers) for the energy efficiency retrofits and renewables projects. In addition, a municipal government may establish a type of land or real property secured benefit district. That is, they may stipulate where PACE can be used.
Any eligible property owners can choose to participate in the program. We recommend that any interested building owner get an efficiency finance expert involved. Companies like Noesis Energy are helping connect the pieces for building owners and have built a financial services team that understands efficiency projects and are experts in PACE and other project finance options.
Remember, PACE – while sometimes confusing – is not a financing roadblock; it is set up to greatly benefit the building owner but there are requirements that anyone seeking a PACE loan must understand. An interested building owner must be current on taxes owed on the property and must not have been delinquent in the past three years, or since owning the property; the same goes with mortgage payments. The owner also cannot be in bankruptcy.
One limitation to understand is that project size for PACE is limited to no more than 20% (10% in some jurisdictions) of the assessed property value. Once again, a finance expert can explain all of the terms in a much more personalized way, based on project specifics and the facility needs.
When is it a good fit?
PACE is an innovative approach and another financing option to assist building owners in paying for the often high-up front cost of energy efficiency projects, but it is not for every project and every property owner. PACE is limited to areas that have both enacted PACE legislation and implemented a PACE program, so it may only be available to a handful of customers who happen to be located in a PACE district.
Also, it was partly conceived for commercial real estate building owners who buy and sell buildings frequently as an incentive and vehicle to make energy improvements. Because the equipment is funded by a tax on the property itself, it is transferred with the building and does not need to be unwound or stay with the seller. And, since property taxes are typically passed on to tenants, the costs of energy efficiency improvements and renewable projects can be paid by the building occupants, not necessarily by the building owner.
Finally, it’s no mystery that many of the buildings that need upgrades the most are those who are owned by people who don’t have the credit to finance the projects necessary. So, the good buildings get better and the bad buildings get worse. PACE provides an opportunity – by using the building as collateral – for building owners with sub-optimal credit ratings find the financing they need to reduce the energy consumption and costs of their buildings.
If you’re interested in PACE for commercial buildings, feel free to contact me at Noesis.
Michael Park is a transactional finance professional with Noesis Energy.
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